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An Economic Evaluation of Model Risk in Long‐term Asset Allocations
Author(s) -
Boucher Christophe,
Jannin Gregory,
Kouontchou Patrick,
Maillet Bertrand
Publication year - 2013
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12049
Subject(s) - economics , risk management , asset (computer security) , time horizon , term (time) , sample (material) , actuarial science , asset allocation , value at risk , financial economics , econometrics , finance , computer science , portfolio , chemistry , physics , computer security , chromatography , quantum mechanics
Following the recent crisis and the revealed weakness of risk management practices, regulators of developed markets have recommended that financial institutions assess model risk. Standard risk measures, such as the value‐at‐risk ( VaR ), emerged during the 1990s as the industry standard for risk management and become today a key tool for asset allocation. This paper illustrates and estimates model risk, and focuses on the evaluation of its impact on optimal portfolios at various time horizons. Based on a long sample of US data, the paper finds a non‐linear relation between VaR model errors and the horizon that impacts optimal asset allocations.